Chinese internet stocks rocked by tough challenges and slow growth

Chinese internet stocks rocked by tough challenges and slow growth

Ali Baba (BABA) and Tencent Holdings (TCEHY), two of China’s largest internet companies, have posted double-digit revenue gains for years. But now they are sputtering amid multiple challenges that have beset most internet stocks nationwide.


Chinese companies face a convergence of threats to their business. They include a resurgence in Covid-19 shutdowns, burdensome regulations, supply chain issues, higher logistics costs, currency depreciation, inflation and a housing downturn.

Moreover, these obstacles arise in the midst of a deteriorating economy at home and abroad. China’s National Bureau of Statistics announced last week that economic activity slowed in October. Retail sales unexpectedly contracted for the first time in five months and exports slowed, as did growth in manufacturing output.

The impact of these challenges appeared in quarterly earnings reports from Alibaba and Tencent last week. Both companies beat earnings expectations but posted weak revenue performance for the second consecutive quarter.

Alibaba’s national e-commerce sales slip

At Alibaba, revenue in the September quarter rose just 3% to $29 billion. This came after reporting flat sales, for the first time, in the prior quarter.

Worse still, Alibaba’s domestic e-commerce unit saw a 1% drop in sales year-over-year. Although user traffic remained stable during the quarter, the frequency of purchases decreased.

Alibaba Chief Executive Daniel Zhang said the state of the economy was the company’s most pressing issue.

“The macro environment would be the primary driver not just for Alibaba, but for everyone in the consumer space, both online and offline,” he said on the post-earnings conference call. of the society. The economy impacts consumer confidence, demand and willingness to spend, Zhang said.

After Alibaba wrapped up its 11.11 Global Shopping Festival, known as Singles’ Day, on Nov. 11, it said the number of shoppers at the event was down from the event of the year. last.

Following the Alibaba earnings report, Baird analyst Colin Sebastian lowered his price target on Alibaba stock to 120 from 140. However, he retained his outperform rating.

“While we expect revenue headwinds to continue in the near term, largely macro in nature, we believe Alibaba has the potential to generate significant operating leverage as e-commerce and services grow. will accelerate,” Sebastian said in a note to clients.

Tencent’s revenue drops in the third quarter

Elsewhere among Chinese internet stocks, Tencent reported disappointing third-quarter sales numbers. He said quarterly revenue fell 2% year over year to $19.7 billion. This follows a 3% decline in the previous quarter.

Tencent is shutting down some unprofitable businesses and laying off staff.

“While the macroeconomic environment remains challenging, our efficiency initiatives allowed us to deliver modestly positive year-over-year earnings growth, which represents a significant improvement over recent quarters,” said Tencent Chairman Martin Lau in a conference call.

Tencent is the world’s largest video game maker and the owner of the popular super app WeChat. The app is used for messaging and fundraising, as well as social media interactions and games.

Internet stocks in a hurry to divest their holdings

Along with its earnings report, Tencent said it would distribute the bulk of its $22 billion stake in meal delivery giant Meituan to investors, via a dividend.

In March, Tencent also disposed of most of its holdings in He distributed more than $16 billion in company stock to shareholders as a one-time dividend.

Alibaba has made comparable disposals of stakes. The divestments are the result of a series of withered curbs by Beijing regulators starting in 2021. The actions targeted the sprawling empires of such internet stocks, which in some cases displayed monopoly power.

Beijing has also imposed restrictions on video game development, play time and content, completely disrupting business models. This has been particularly detrimental to Tencent.

Other China Internet Stock Reports

Chinese e-commerce company (JD), however, managed to reverse the negative trends with its quarterly earnings report. JD posted a double-digit revenue gain, up 11.4%, accelerating from 5.4% growth in the previous quarter.

Among other Chinese internet stocks, Baidu (BIDU) will publish its quarterly results on November 22. Baidu offers various Internet services, including China’s largest search engine.

Please follow Brian Deagon on Twitter at @IBD_BDeagon to learn more about tech stocks, analysis and financial markets.


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